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An Extension of Spatial Dependence Models for Estimating Short-Term Temperature Portfolio Risk

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  • Robert Erhardt
  • David Engler

Abstract

Temperature risk is any adverse financial outcome caused by temperature outcomes. The Chicago Mercantile Exchange lists a series of financial products that link payments to temperature outcomes, and these products can help buyers manage temperature risk. Financial institutions can also hold a portfolio of these products as counterparty to the buyers facing temperature risk. Here we take an actuarial perspective to measuring the risk by modeling the daily temperatures directly. These models are then used to simulate distributions of future temperature outcomes. The model for daily temperature is a spatial ARMA-EGARCH statistical model that incorporates dependence in both time and space, in addition to modeling the volatility. Simulations from this model are used to build up distributions of temperature outcomes, and we demonstrate how actuarial risk measures of the portfolio can then be estimated from these distributions.

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  • Robert Erhardt & David Engler, 2018. "An Extension of Spatial Dependence Models for Estimating Short-Term Temperature Portfolio Risk," North American Actuarial Journal, Taylor & Francis Journals, vol. 22(3), pages 473-490, July.
    • Handle: RePEc:taf:uaajxx:v:22:y:2018:i:3:p:473-490
    DOI: 10.1080/10920277.2018.1444496
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    Cited by:

    1. Yaoyao Wu & Hanqi Liao & Lei Fang & Guizhen Guo, 2023. "Quantitative Study on Agricultural Premium Rate and Its Distribution in China," Land, MDPI, vol. 12(1), pages 1-14, January.

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